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Newsmakers : Hedge funds under increasing scrutiny

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An SEC proposal to register hedge fund advisers has received a mixed response, with some welcoming it as long overdue and others saying it could impose a regulatory burden that would mean the SEC was less able to focus on uncovering existing abuses if it had to devote resources to registration.

Hedge funds make up an increasing percentage of mutual and pension fund investment. However, in the past three years, between 40 and 45 cases of abuse have been brought to the SEC’s attention. In an effort to protect less prudent investors, the SEC has proposed the new snappily named Rule 203(b)(3)-2, which requires hedge fund advisers with at least $25 million worth of assets under management or 15 individual clients to register with the SEC. It also calls on hedge funds to appoint a compliance officer and implement fraud controls.

While the Investment Company Institute welcomes the SEC’s proposal as long overdue, CarbonBased Consulting in New York asserts that “full blown registration” is not an effective means of reducing the incidences of abuse currently promulgated by a small percentage of the industry. Furthermore, it says abuses will get less focus as the new regulation would place an additional burden on an already under-resourced SEC staff.

“Registration is not the be all and end all,” says Kenneth M. Neuhaus, Carbon’s executive vice president and COO. “There is anecdotal evidence to suggest that simply through registration, you are not going to eliminate abuses.” Given the annual cost associated with the registration and reporting process of registering, which is in the region of $50,000 or more, Neuhaus says, “This would be a big burden for hedge funds, which do not have multitudes of people working for them and whose business model does not support this.”

Neuhaus believes that a less onerous form of regulation would be a centrally maintained database containing fund name, address, assets under management, key strategies deployed and key officers. “Short of full regulation, there needs to be a common point where investors can go and do due diligence on hedge funds,” he says. “There also needs to be some kind of assurance that when they sign up to a hedge fund, he/she understands the underlying risks.”